Sunday, January 29, 2017

This article in Motley Fool raises the question and then looks at the pros and cons as to whether Trump would actually do something like returning to the gold standard. The article concludes he will not for a variety of reasons. Below are a few excerpts.

Donald Trump is going to have a busy first 100 days in office. Based on his plan of action, released just hours after declaring victory in November, Trump plans to tackle dozens of policies ranging from tax reform to repealing and replacing the Affordable Care Act.

However, Trump has other plans in mind, too, extending beyond his first 100 days in office. Among them, he's suggested bringing back an idea that hasn't been U.S. government policy for 46 years. That's right folks: the gold standard.

Is Trump really bringing back the gold standard?

There's a pretty good chance that some of you reading this right now probably weren't even alive the last time the U.S. had the gold standard in place (1971), so let's start with a brief description. Because most of the world's economic powers had different currencies in the 1800s and 1900s, gold served as the common denominator by which the U.S. dollar, British pound, French franc, and other major currencies were backed. In pretty simple terms, a dollar (or any other currency, for that matter) could be exchanged for actual gold upon demand, which presumably encouraged trade and trust and made things simpler.

In an interview with GQ last year, Donald Trump said the following when questioned about his views on the gold standard:

"Bringing back the gold standard would be very hard to do, but boy would it be wonderful. We'd have a standard on which to base our money."

My added comments: If the US ever did return to the gold standard, that would be huge news of course. The type we watch for here. However, before any major change like that would even be considered, I think we would have be under the kind of crisis conditions that Jim Rickards and others have talked about. A crisis so severe that it would be impossible to preserve the existing monetary system.

We don't rule anything out here and just continue to monitor events to see what actually does happen. If the existing system were to ever collapse, something would have to eventually replace it. There are a variety of competing proposals out there that could be put forward. We have tried to cover some that might be consideredhere so that readers would have some idea of what to expect. It seems more likely that some other proposals than a return to an actual gold standard would be considered first, but until the situation actually happens, there is really no way to know. And if a crisis of that magnitude does not arrive any time soon, we don't look for much major change to take place any time soon.

Anything that changes the system such that the US dollar is no longer used as the world's global reserve currency in its present format (fiat based) would be considered major monetary system change here on this blog. We'll continue to follow it for awhile longer.added note: a thank you to a reader for sending me a link to this article.

Friday, January 27, 2017

In this CNBC article, IMF Director Christine Lagarde asks why no one listened to her when she warned about income inequality earlier. She goes on to call for "policies that would help this disgruntled middle class." Below are a couple of excerpts.

"Christine Lagarde, the managing director of the International Monetary Fund (IMF), is still incredulous as to why no one listened to her warnings about income equality and the effects that it could lead to.

Speaking at a Bloomberg hosted panel at the World Economic Forum in Davos, she was reminded of a plenary speech that she gave at the event in 2013.

"It did not get much traction," she said. "Well, I hope people will listen now," she quipped."

. . . .

"She concluded that it was now an opportune time for global lawmakers to put in place the policies that would help this disgruntled middle class."

My added comments: This is something we talked about quite a bit here as we followed clearly rising resentment fueling the Trump campaign. This is really not as mysterious as it appears to seem to the elite class. The average person does not pay that much attention to all the issues and causes that the elite class has the time and money to get involved with. Most people don't have time to study those kinds of issues because they are busy trying to make a living and don't see any connection at all to what the elite class feels is important to their daily lives (climate change, progressive global taxation, etc.). They want a decent job to be able to support themselves and their families.

Beyond that, many people don't really trust the organizations and institutions that are important to the elite and tend to view them with suspicion rather than admiration. They tend to think they are more part of the problem than part of any solutions that might improve their lives. Trust in mainstream media is at an all time low right now as well.

At this point, the elite class has pretty much lost the trust of this group of people who are not likely to listen to any solutions they put forward no matter how well intended. Until the elite class (like those who meet at Davos) understand that most people are not interested in their ideas or solutions, they will probably continue to be puzzled because everyone they know in their circles is interested.

The best solution is for them to spend some real time listening to the people that puzzle them with true respect. You can't address the concerns people have if you don't really understand them and you have to get out of the bubble you live in to do that. I doubt this is likely to happen. Just looking at polls and only listening to fellow elite explanations of why people feel this way won't provide real answers. Jim Rickards kind of points this out recently in some amusing tweets about Davos here and here.

What is more likely is that the elite class will just wait patiently with the expectation that Trump will have to endure a major financial crisis sometime during his term. At that point the door will be open to place the blame for the crisis on his policies. If that happens, the public mood could shift and be more receptive to their ideas for solutions (reject nationalism and populism).

This will be a key to watch for here over the next year. What happens if the crisis arises during Trump's term? Who will the public blame for it? Whose solutions will the majority of the public be willing to listen to? In a truly complex system, the answers to these questions are unknown. If no crisis emerges during Trump's term and he delivers decent jobs, the questions are somewhat irrelevant. In that case,Trump will probably stay popular and control the agenda for some time because the "middle class" trusts him more than they trust the "elite" class. Until he fails them, that probably won't change much. It really is that simple.

Sunday, January 22, 2017

Jim Rickards offered some new thoughts on problems he sees ahead for Trump and China as soon as Trump takes office. Jim had just returned from a trip to China. His comments are presented in this article in The Daily Reckoning. Below are a couple of excerpts from the article.

“He (Trump) is going to call for an end to subsidies to major Chinese industries such as steel. He’s going to demand a strong yuan to make up for years of an undervalued yuan. And he’s going to ask for help with the North Korean nuclear problem, the South China Sea disputes and an end to Chinese hacking and theft of intellectual property.

“If China does not meet Trump halfway on most of these issues, Trump is prepared to impose tariffs, border adjustment taxes and other penalties on Chinese imports to the U.S. Trump has also indicated he’s willing to put the ‘One China’ policy on the table and improve U.S. relations with Taiwan.”

The problem is that Trump will make demands Chinese leaders can’t possibly meet — even halfway.

“China cannot end subsidies, because . . . ."

. . . . .

“This is a slow-motion train wreck. Trump will make demands, China will refuse to strike a deal, Trump will impose tariffs and taxes, China will retaliate by devaluing its currency, and matters will escalate into a full-scale trade and currency war."

Added note: Jim Rickards recently did a 2 hour webinar discussing China as part of a promotion for his newsletter. Jim revealed some important information in this webinar along with a bold prediction. While some of the information would be proprietary in nature and intended for those who signed up for the webinar, I can say he did predict that a significant currency event will happen in 2017, perhaps soon after Trump takes office.

He went on to say it was possible that this event could be significant enough to trigger the kind of major crisis he has talked about for some time. He did not make a prediction that it will be the trigger, but in response to a listener question said it was possible it could be the trigger (along with a number of other potential triggers). Based on his comments, I will follow this event closely during 2017 to see how it plays out.Added note: Some of the information Jim talked about in his webinar is covered in this recent discussion available online here. (text transcript here)Also, one of the potential trouble spots Jim has talked about recently that could emerge between Trump and China is the One China policy that China insists upon. China confirms that in this BRICSPOST article virtually as soon as Trump takes office. They warn that any challenge to the One China policy would be "playing with fire."I cannot emphasize strongly enough how important it is to stay alert to the interaction between China and Trump based on Jim Rickards comments and the fact that we can see it playing out right in front of our eyes. Trump tends to go public with his comments and China appears ready to reply in public immediately. What starts out as something like a TwitterPR battle could lead to a more serious situation so we need to watch it closely.Additional added notes (1-23-17): China Daily - Trump Speech Spurs WorryCNBC - Trump is "Always Negotiating" - this is the counterpoint that Trump supporters will mention. The idea is that people should not worry about dramatic statements Trump makes because he is "always negotiating" and everyone knows he will eventually compromise. It will be interesting to see if this style that Trump has used in the business world will work for him the same way in the geopolitical world. China will be a good test case for us to follow. Jim Rickards is saying that Trump expects China to compromise with him, but is asking them to make concessions where they cannot compromise so the potential for a miscalculation by either or both sides is in play.Stephen Roach in Project Syndicate- agrees that China will fight back against Trump - sees the potential for much higher inflation as an end result. No mention of using a yuan currency devaluation as a weapon.

Friday, January 20, 2017

If you want to stay alert and informed about the status of potential systemic risks to the global financial system (which we do here), you should make it standard practice to monitor key speeches by BIS officials. Below is the conclusion section to a recent speech by Jaime Caruana (General Manager of the Bank for International Settlements. He provides somewhat of an update on how he views systemic risks at this point. We have covered this topic pretty heavily here over the past few years.

Conclusion

In sum, despite the improvements in many areas since the crisis, the system as a whole is facing new and evolving risks. I would like to think of these new challenges in systemic risks as encouragement for all of us here to persevere with finalising and implementing the post-crisis regulatory reforms in a timely fashion.

These challenges are also a reminder to be humble and to recognise that, in this complex world, mitigating systemic risk requires a wider perspective and action in a variety of policies. The key areas in the regulatory reform agenda - regulation and supervision, resolution and deposit insurance - are no doubt very important, but they may not be enough.

Reforms are also needed to raise productivity growth, generate earning and repayment capacity, and improve the outlook for the longer term. Monetary policy and fiscal policy, for their part, would do well to take financial stability considerations and their longer-term impact on the real economy into account.

Indeed, financial stability is a joint responsibility. For our community of supervisors, deposit insurers, central bankers and representatives of international organisations, interaction and cooperation are more crucial than ever.

I hope this conference represents another valued opportunity for all of us to work towards this common goal. I wish you all a very productive time here.

Monday, January 16, 2017

The current monetary system is based on the US dollar as the global reserve currency. No one really disputes this although many believe there are a variety of threats out there to the US dollar maintaining this status.

Below are excerpts from recent articles that talk about some of these potential threats to the US dollar. We care about this because if the US dollar did lose its status as global reserve currency, it would be the kind of major sea change we watch for here and something else would (of course) have to take over that role.

"The president elect of the US, Mr. Trump, does not know what he is doing when he proposes protectionist measures to encourage the reindustrialization of the US and bring home again, the American industry that emigrated to foreign lands.

The US lost their industry as a result of the Bretton Woods Agreements, which were signed (under pressure) by representatives of the allied countries and of the countries conquered by the US in World War II. Those Agreements established the world's monetary system for the post-war world, after the victory of the Allies, which was already in sight in 1944."

. . . . .

"In 1960, the economist Robert Triffin detected the central problem residing in the Bretton Woods Agreements. I detected the same problem without having any knowledge of "Triffin's Paradox", as it has come to be known. Many years ago, sitting in my office smoking my cigar and contemplating the world's financial situation, I came to the same conclusion as Triffin.

In a few words, it turns out that in order for the international monetary system established at BrettonWoods to function, the US is forced to run a permanent trade deficit with the rest of the world. Year after year, the US must purchase more from the rest of the world, than what the US sells to the rest of the world, thus creating a permanent flow of dollars to the rest of the world. This flow makes possible the creation of Monetary Reserves in the Central Banks of the rest of the world.

Without this constant flow of dollars from the US to the International Reserves of the Central Banks of the world, the currencies issued by those Central Banks would cease to exist. If Banco de México, the Mexican Central Bank, does not have dollars in its Reserves, then Mexicans do not have money: without dollar Reserves, the Mexican peso would not be worth peanuts - at least, in international terms."

. . . .

"If Mr. Trump should attempt to eliminate or reduce the US trade deficit and protect and encourage US reindustrialization by means of tariffs on imports, what he would achieve would be to choke the economies of the rest of the world with a scarcity of dollars obtained - how else? - by exports to the US.

Choking on dollar scarcity, because exports to the US decline or are eliminated, the world will not remain in paralysis. Another alternative to the dollar as the world's currency will be sought, simply because finding an alternative becomes a matter of life or death.

"Now is the time to keep your eyes on the monetary endgame. Not the daily mark-to-market in paper gold. This endgame is an all-out attack on the status of the US dollar as the benchmark global reserve currency. Numerous players have an interest in ending the dollar’s role for reasons ranging from climate change (global problems require global money solutions) to geopolitics (Russia and China both have regional hegemonic ambitions in Eastern Europe and East Asia respectively)."

. . . . .

"Currently US dollar-denominated instruments and transactions constitute about 60% of global reserves, and 80% of global payments respectively. The US monopoly of power over dollar payment channels gives the US unrivaled dominance over the international monetary system and the economic well-being of every nation on earth. Adversaries naturally chafe at this immense power especially in light of US imposed sanctions that are considered overbearing and unjustified by the targets. Those adversaries do not issue currencies that are potential alternatives to the dollar because of inadequate rule-of-law, immature bond markets, primitive capital markets infrastructure, or all three. The only feasible alternatives to dollar dominance are special drawing rights (SDRs) issued by the IMF, and gold."

. . . . .

"Indicators all point in the same direction — Treasuries are being dumped, and gold is being acquired by the largest investors in the world. This is being done not as a ‘day trade’, but as a strategic geopolitical move.

This means these trends will continue until the aims of the ‘Axis of Gold’ (China, Russia, Iran, Turkey) have been achieved. Those aims include the overthrow of the US dollar as the benchmark global reserve currency."

My added comments: Just in these two articles we see a number threats to the US dollar as global reserve currency put forward. Proposed Trump policies, Chinese gradual dumping of US Treasuries, US adversaries weary of the current US dollar status working to undermine it, etc.

One reader here sent me the thoughts below in an email suggesting another potential threat to the US dollar:

The petrodollar was not an arrangement that “evolved”, but rather, one that was dictated by a U.S. Government “perceived necessity” in the aftermath of the closure of the gold window, and the first oil crisis. One of the connections that perhaps few people make between that shift (from SETTLING imbalances with gold), versus “dollars needed to purchase oil” (which are then recycled into treasury securities ) is that the switch “enabled” both expanding INTERNAL budget deficits, and external TRADE deficits, which after the early 1980’s grew into large“labor arbitrage” related deficits, as corporations moved manufacturing capacity outside the U.S. That transfer ultimately helped create the Trump presidency.

Without “settlement via debt instrument”, you simply cannot maintain giant trade deficits with the rest of the world. It was the global “necessity of oil”, coupled with U.S. induced GCC “insistence” that it be paid for in dollars, which allowed the system which has continued until now.

So, when looking for a candidate to trigger the next, larger financial crisis, one good candidate could turn out to be the loss of dollar status in “oil settlement”, particularly as Russia plus Iraq plus Iran become serious rivals to GCC in determining just “what” will be accepted in payment for oil.

Just a thought"

Recently, articles are appearing in mainstream media suggesting that Trump's policies will create a surge in the US dollar and then potentially trigger a new major global crisis as a result later on. (see examples here and here).

Here on this blog, we don't claim to know if this major change in the status of the US dollar as global reserve currency will happen any time soon or not or what might trigger that. What we do believe is that if any of the above potential triggers do take down the US dollar as global reserve currency, something has to eventually replace it. Hugo Salinas Price wants some kind of precious metals backed currency. Jim Rickards proposes that the SDR will be put forward as the replacement (and adds that gold might be involved in the process). Whatever is done if this happens will most certainly have a big impact on all of us, which is why we follow it here.

If this major sea change does take place during Trump's term, we are really flying blind as to how he would deal with it. It was never discussed during the campaign. Trump has some advisers who are known to be strong gold advocates and others who seem to be part of the existing financial establishment. If faced with a huge global crisis where the US dollar lost its status as global reserve currency, I have no idea how Trump would respond. One highly credible source offered me this observation in an email (partial quote):

"Elites might decide to allow a crisis . . . . . Where it gets interesting is if Trump acquiesces (as Bush 43 did when Paulson and Bernanke walked into the Oval Office and demanded a bail-out) or whether Trump pushes back with an "America First" reply, in which case the whole thing will be worse than the Great Depression. I'm calling that outcome the Stone Age."

Added note: If this major change never happens, the information on this blog is not really vital to know about. However, if this change does happen, there is a lot of information on the blog that would be important to understand. If the SDR were put forward as a replacement for the US dollar, you can find very good information on that here. There could be other proposals which we mentioned in an earlier blog article here. This information will remain here for anyone who can use it and will continue to be relevant for the most part if we ever do see the major monetary system change we watch for here. The articles in these links contain direct input from some of the leading sources in the world on the topic of potential monetary system change.

Added note 1-19-17:Jim Rickards did an online presentation last night with some significant information and a bold prediction in it. Because it is part of a promotion for one of his newsletters, the rebroadcast of it will only be available until tonight. So, for anyone interested, here is a link to the presentation that will be good for a few hours today only. For me, the key point to take from this is his prediction about the potential for a significant currency event this year related to China. (perhaps soon after Trump takes office)

Friday, January 13, 2017

Bloomberg runs this article quoting Larry Summers as suggesting that if we do get another major financial crisis, Donald Trump may be to blame. This bears watching because one theory we have followed here is that some believe that Trump is setup to be blamed for any upcoming crisis ahead. This article is supportive of the idea that this could really happen. Below are the introductory paragraphs.

"Former U.S. Treasury Secretary Lawrence Summers attacked the policy proposals of Donald Trump on several fronts, saying the president-elect’s plans for deregulation were setting the stage for the next financial crisis.

“The deregulation in some areas like finance is hugely dangerous,” Summers said Sunday in an interview on Fox News Channel. “Who wants to go back to the era of predatory lending? Who wants to go back to the era of vastly over-levered banks?”

. . . . . .

"Trump’s plans to reduce corporate taxation, Summers said, would “hugely increase inequality” and could also help strengthen the dollar, further hurting U.S. exporters and the people who work for them."

My added comments: Comments like these coming from a source like this gets my attention. It suggests to me that there is still real concern that another major financial crisis could unfold during the Trump term of office. Clearly, if that were to happen, who the public blamed for the crisis would be important in terms of who the public would trust to try and deal with the crisis. Lots of what ifs and unanswered questions here. Only time will reveal what actually happens which is what concerns us here.

Just a few questions we could raise:

- Will we get a new major financial crisis during Trump's term?

- If we do, who will be blamed for it by the majority of the public?

- What solutions will be proposed to deal with the new major crisis?

- Will a solution involving the IMF as global lender of last resort and the SDR as global reserve currency be put forward? If so, how would Trump respond to a plan like that?

- Are people like Larry Summers trying to "get ahead" of a potential new crisis and point a finger of blame now to try and prepare the public to think in those terms later?

Again, we have the answers to none of these questions. But when we see articles like this, we can reasonably assume that the idea of a new major crisis in the future is still very much in play and that who gets blamed is also of concern. Why make a statement like this otherwise?

Monday, January 9, 2017

With the world clearly heading in a new direction as the Trump Administration takes office in 2017, I thought this might be a good time to do a brief Q&A style update for readers as to where things seem to stand. Reader questions, input, and article links are always welcome.

Q: Does Trump taking office change the picture in a significant way?A: In some ways yes and in other ways no. It does not change what this blog follows in any way. Here we simply are watching for any indication that significant monetary system changes are in progress that would truly impact our lives in a meaningful way. We will continue to watch for that no matter how the political environment might change. Of course Trump will likely make different policy decisions and take some different paths than Hillary Clinton would have. However, it is hard to say whether those differences would have that much impact long term on what we follow here. The conditions that might lead to significant monetary system change (systemic risks, etc) have been building up for many years during both Republican and Democratic periods of political control (and also during gridlock which has been in play quite a bit of the time as well). They are not likely to be solved very quickly by anyone. All we can do here is wait and watch.Q: Have the big issues for this blog changed in any way?A: No. The two big issues here remain:1- Will we get another major financial crisis much bigger than any we have seen before as predicted by Jim Rickards and many other analysts? (note: we feature Jim here quite a bit because he is well known, widely respected, does many free media interviews, and has a clear prediction of a major crisis we can follow over time)2- If we get the big crisis, what solution will be put forward to try and fix the problem?We can probably add this sub question (2a if you wll): Would Trump deal with such a crisis much differently than anyone else would? We don't know the answers to #1 and #2 yet. And now we can add #2a. It is very possible that this kind of crisis/situation would be dealt with the same way no matter who was President of the US. Time will tell.What we do know is that such a crisis is possible and therefore we must continue to monitor events as we really have no other choice. Sticking a head in the sand is not a wise option.Q: What are your best information sources saying now?A: First, let me say that I have been very fortunate to get direct input from some incredibly well informed and high credibility sources. I try not to bother them much unless something important is happening. but they all have been extremely kind and generous to provide me direct honest answers to questions when I do have them. This has allowed me to present better information to readers than I can just reading and searching news articles on my own.Interestingly, all of my best sources are pretty similar in their view as best I can tell. They don't know the answers to the above questions either and are watching and waiting just like we are to see what actually happens. Trump is somewhat of a puzzle for everyone. He is not a hard core idealogue on many issues. He has issued many what seem to be contradictory statements over the years. He seems to seek input from a broad variety of people across the spectrum including some viewed as "establishment elites" and some viewed as challengers of the establishment. He is a deal maker at heart and seems to value what he thinks are results above all else on many issues. All of my sources including those like Jim Rickards are not really sure what Trump will actually do if he is presented with the major crisis we watch for here during his term. Some of my sources have concerns with various aspects of Trump's public policy views, but still really don't know for sure what he will actually do. All of them hope whatever he does is successful, but view him as somewhat of a wild card with no way to accurately predict his actions. They hope he does not create an atmosphere that inhibits free trade with the current system as fragile as it is right now, but they understand that trade needs to be both free and fair so we have to just see what Trump means when he talks about this.Q: What do you think Trump will do if presented with The Big Crisis during his term?A: All I can do is guess of course. My sources would be far more likely to know that I would and they really don't know as I mentioned above. My best guess is that if a major crisis as bad as Jim Rickards is predicting were to actually arise during his term, Trump would eventually agree to whatever the experts he trusts most advise him to do. I don't think Trump has envisioned something like this as happening so he would likely be caught somewhat off guard. He might literally have no other choice than to accept the IMF as global lender of last resort that Jim Rickards forecasts. The alternative might be a complete meltdown of the system (we might go back to the Stone Age as one of my sources said to me in an email). If that were the case, I would expect him to turn into a salesman for this proposed solution despite his attacks on globalism as a candidate. Of course, that does not mean that solution would actually work either. It's all just a giant unknown. He might surprise everyone and simply go directly to the public and level with them as to what caused the situation and what the realistic options are to deal with it. I don't know and hope we don't have to find out. The atmosphere would probably be filled with political poison and mass confusion could easily result as various special interests tried to take advantage of the situation/crisis. All this is why we have no choice but to stay alert and informed ourselves and keep some kind of backup plan in mind that we hope is never used.

Q: What if nothing major happens during the next four years?A: That's possible too. If I had time I could list hundreds of failed systemic crisis forecasts I have read over the past 10 years doing research for this blog. While there is always a nagging feeling in the air that at some point the system will go over the edge, it has not happened yet. I don't know of anyone on earth who could possibly know for sure of the timing of an event like that. I plan to continue to monitor events here until at least early to mid 2018. If there is still no indication of a major crisis like we are talking about here, I will likely discontinue regular blog articles. If I do that, I will leave all existing content and articles here and would add new articles if a major event ever unfolded. But I have published most of the most important information I can find here already in the list of systemic risks and the articles on the potential for the SDR to eventually replace the US dollar as global reserve currency. The input from people like Jim Rickards, Dr. Warren Coats, Claudio Borio, William White and Robert Pringle in those articles is as good as you will find on this topic in my view and won't really change much over time. If events unfold such that this information is needed, it will be here for anyone who can use it. If they don't, it will still be here for anyone just interested in learning more about it.Q: What can the average person do in an environment like this?A: Every situation is unique of course and people are in different situations. I have always felt that just simple common sense provides a few simple things most everyone can do:1- try to stay alert and informed and watch for signs of systemic instability2- try to reduce debt as much as possible3- try to build up an emergency fund (include a precious metals component if possible)4- keep some emergency supplies on hand as best you can (some extra food, water, etc)5- develop a network of trusted friends, relatives, etc to deal with stressful circumstancesNone of the above are overly difficult to do and can be done by most people. They are really just common sense and should be done whether we ever get a huge financial crisis or not. Number 1 seems obvious, but I find that most people I know do not make much effort to do it despite how obvious it seems. Perhaps they have a hard time finding good information with all the various misinformation and disinformation that is out there. This blog attempts to help with that as best we can. Q: What should I expect on the blog in the short term?A: Not much change. Probably just a few articles here and there unless something major happens any time soon. Right now I have no indication that I should expect that, so I will try to just put out an article every now and then, but with no regular schedule. Just based on what news I see out there. The whole world is kind of just waiting to see what Trump is going to do.

Saturday, January 7, 2017

With the news in December that IMF Director Lagarde was found guilty of negligence but would not receive any actual punishment, the IMF Board quickly issued a statement of support for Ms. Lagarde. This was mostly viewed favorably around the world, however there are some dissenters.

Below are a couple of articles (one pro Lagarde and one con) that illustrate the debate over how effective she can now be at the IMF. This could be an important issue if another global financial crisis were to erupt and the IMF role in that crisis moved to center stage.

"As managing director for the past five years, Lagarde has been a ubiquitous presence on the world stage. Her aura of confidence and competence has provided a reassuring calm amidst global crises and economic uncertainty."

. . . .

"Lagarde has inspired the confidence and trust of countries around the world and for good reason. Her continuing leadership will benefit everyone."

"What exactly do you need to do to get fired as managing director of the International Monetary Fund?

Turn the Greek economy into a wasteland? Nope. Dangerously politicize the body by taking sides in a referendum? Nope, not that either. A conviction for financial negligence? That seems to be just fine.

Short of sexual assault, there seems to be just about nothing that will get you removed from office at the IMF.

This week, IMF Managing Director Christine Lagarde was found guilty of negligence during her time as finance minister of France under then-President Nicolas Sarkozy. The result? Absolutely nothing. The court chose not to punish her, and the board of the IMF decided that she could remain in office.

And yet that is surely a decision the Fund will come to regret." . . . .

Wednesday, January 4, 2017

Here is an interesting article on Project Syndicate by Professor Robert Skidelsky. Is he saying that markets are a complex system (see Jim Rickards comment below) and that economists tend to try and over simplify things with standard economic models (which may be why they miss seeing a major crisis coming)? I'll let readers decide for themselves what message he conveys in this article. Below are a few selected excerpts.

"Let’s be honest: no one knows what is happening in the world economy today. Recovery from the collapse of 2008 has been unexpectedly slow. Are we on the road to full health or mired in “secular stagnation”? Is globalization coming or going?

Policymakers don’t know what to do. They press the usual (and unusual) levers and nothing happens. Quantitative easing was supposed to bring inflation “back to target.” It didn’t. Fiscal contraction was supposed to restore confidence. It didn’t. Earlier this month, Mark Carney, Governor of the Bank of England, delivered a speech called “The Specter of Monetarism.” Of course, monetarism was supposed to save us from the specter of Keynesianism!

"This takes us back to John Stuart Mill, the great nineteenth-century economist and philosopher, who believed that nobody can be a good economist if he or she is just an economist. To be sure, most academic disciplines have become highly specialized since Mill’s day; and, since the collapse of theology, no field of study has aimed to understand the human condition as a whole. But no branch of human inquiry has cut itself off from the whole – and from the other social sciences – more than economics."

"If you believe that economies are like machines, you are likely to view economic problems as essentially mathematical problems. The efficient state of the economy, general equilibrium, is a solution to a system of simultaneous equations. Deviations from equilibrium are “frictions,” mere “bumps in the road”; barring them, outcomes are pre-determined and optimal. Unfortunately, the frictions that disrupt the machine’s smooth operation are human beings. One can understand why economists trained in this way were seduced by financial models that implied that banks had virtually eliminated risk.

Good economists have always understood that this method has severe limitations. They use their discipline as a kind of mental hygiene to protect against the grossest errors in thinking. John Maynard Keynes warned his students against trying to “precise everything away.” There is no formal model in his great book The General Theory of Employment, Interest, and Money. He chose to leave the mathematical formalization to others, because he wanted his readers (fellow economists, not the general public) to catch the “intuition” of what he was saying."

"What unites the great economists, and many other good ones, is a broad education and outlook. This gives them access to many different ways of understanding the economy. The giants of earlier generations knew a lot of things besides economics."

Added note: I mentioned this article to Jim Rickards to get his thoughts on it. He offered this reply:

"He's not going so far as to say markets are a complex system, but he is saying existing mathematical models are obsolete. He seems to be arguing for non-mathematical approaches including psychology, history and law. I agree with that completely, but there is room for math as long as the model accurately corresponds to the real world." ---- Jim Rickards

Sunday, January 1, 2017

As we head into 2017 I would highly recommend readers watch the debate below between Jim Rickards and Ann Pettitfor held in London recently. You can watch it below. Below I have some added comments about this debate/discussion and why it relates to our Crisis Watch here.

My added comments: This debate/discussion is fascinating not because of the points of disagreement between Jim Rickards and Ann Pettitfor. Instead, it is the many key points on which they AGREE that we need to pay attention to in terms of our Crisis Watch.

In this debate we have two very intelligent and respected individuals who come from very different points of view on many issues. But in this debate, they clearly both agree that the present monetary and financial system is headed towards a major crisis at some point. Neither tries to predict timing but both clearly see a crisis coming. This is why we must continue to stay alert and watch as events unfold.

There are simply too many very smart and highly respected sources who are concerned about the potential for a future major crisis to ignore it. They may not agree on how the world authorities should deal with a crisis or when it may happen, but they do see one coming eventually. Hopefully, it does not happen, but we are forced to keep a watch out for one and will do that here as best we can. Always keep in mind that it could happen very quickly and without much warning due to the systemic risks that do exist all the time.We should add that in December, the BIS (Claudio Borio) said that markets seems to be handling things better right now, but investors should stay alert for sudden bursts of volatility. He added that we may get another "flash crash" event at some point, but that he did not expect that to impact the stability of the system in general.Added note: Jim Rickards goes on record in this article with a prediction that we will see the kind of major crisis he predicts sometime during the Trump term of office and repeats his forecast in this newer article.Major questions on the minds of many as we head into 2017 (see a few more here): Is Donald Trump setup to head into a situation where a crisis overwhelms him no matter what policies he tries to put in place? If it does happen, would he accept a solution initiated from the IMF where the SDR replaced the US dollar as the global reserve currency? Perhaps two of the most important questions we face going forward that were not discussed in any way during the US election campaign. At this point, I have no idea as to the answer to either question. Trump seems to listen to input from a variety of sources so who knows for sure which view will prevail during a time of major financial crisis?

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